Question

Quirk Drugs sold an issue of 30-year $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semi-annually. It is now 10 years later and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?

Answer 1

The value of bonds will sell at premium and decline in value until maturity.

Explanation:

Coupon = $\frac{0.1085 \times 2} {2} = 54.25$

Number of periods =$20 \times 2$ = 40

Rate = $\frac{9} {2} = 4.5%$

Price = $1,170.21

Key to use in a financial calculator are: FV =1000, N = 40, PMT = 54.25,$\frac {I}{Y}$ = 4.5. CPT PV

As the bond approaches maturity, price of bond will approach its face value.

Thu, it is clear that bonds will see at premium and would decline in value until maturity.